Earnings Call Transcript - GSL Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Global Ship Lease Third Quarter 2020 Earnings Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to hand the conference over to Ian Webber, Chief Executive Officer of Global Ship Lease. Thank you. Please go ahead, sir.

Ian Webber, CEO

Thank you very much. Good morning, good afternoon, everyone, and welcome to Global Ship Lease Third Quarter 2020 Earnings Conference call. A slide that accompanies today's presentation is available on our website at www.globalshiplease.com. Slides 2 and 3, as usual, remind you that today's call may include forward-looking statements that are based on current expectations and assumptions and are, by their nature, inherently uncertain and outside of the company's control. Actual results may differ materially from these forward-looking statements due to many factors, including those described in the safe harbor section of the slide presentation. We also draw your attention to the Risk Factors section of our most recent annual report on Form 20-F, which is for 2019 and was filed with the SEC on April 2, 2020, and which you can obtain via our website or via the SEC's. All of our statements are qualified by these and other disclosures in our reports filed with the SEC. We do not undertake any duty to update forward-looking statements. For reconciliations of the non-GAAP financial measures to which we will refer during this call to the most directly comparable measures calculated and presented in accordance with GAAP, you should refer to the earnings release that we issued this morning, which is also available on our website. As usual, I'm joined by our Executive Chairman, George Youroukos; our Chief Financial Officer, Tassos Psaropoulos; and our Chief Commercial Officer, Tom Lister. George will begin the call with some high-level commentary and an update on our current areas of focus. And then Tassos, Tom and I will take you through the quarterly results, our current market environment, and our financials, after which we'll be pleased to take your questions. Turning now to Slide 4. I'll pass the call over to George.

George Youroukos, Executive Chairman

Thank you, Ian and good morning or good afternoon to you all. As you may recall, on our last quarterly earnings call, we expressed guarded optimism about the signs that we were beginning to see for a potential charter market recovery. Three months later, I'm very happy to confirm that the container shipping industry has significantly outperformed all expectations and the charter market for our ships has experienced a remarkable rebound and continues through today. Demand for containerized freight has bounced back with volumes and freight rates in certain trade ranges reaching record highs. In order to service this robust demand, our liner company customers have been extremely active in chartering ships, rapidly driving idle tonnage down from a second quarter peak of around 12% to below 2%, a level that is close to full employment for all of our purposes. Furthermore, in the Post-Panamax segment, where over 75% of our fleet capacity is concentrated, competition between charterers for tonnage is particularly fierce and idle capacity is pretty much zero. Is global supply catching the wave? The answer is yes. First of all, we're reporting both revenues and adjusted EBITDA that are up from the third quarter of 2019, reflecting both fleet growth and recent market strength; second and perhaps more significantly, as charters expired, we have been able to sign 15 new charters or extensions since the beginning of July for combined revenues of over $120 million, demonstrating our ability to lock in contracts at good economics and for longer periods with top-tier liner companies when the time is right. As of September 30, we have a total of $674 million of contracted revenues over an average period of 2.3 years. Importantly, in the face of weaker demand earlier in the year, the liner companies, our customers have demonstrated a new level of resilience and discipline in managing capacity, which has allowed them to deliver stellar results despite COVID. That combined with our ability to secure strong charter rates and improve our forward contract cover, as well as our reduced leverage, has allowed Moody's to recently upgrade our credit outlook. With that background, we believe that we have excellent momentum as we pursue the strategic priority of opportunistically refinancing our 9.875% notes that come due in late 2022. The containership market is becoming more mature, with both owners and operators moving forward, embracing the multiple challenges that we face. In view of that and supporting the type of accountability that we believe is important, we have also published our inaugural ESG report, providing investors and other key stakeholders with insight into our approach to running a business in a forward-thinking sustainable and socially responsible manner. With that, I will turn the call to Ian.

Ian Webber, CEO

Thank you, George. On slide 5, we have an overview of our fleet. We have a total of 43 containerships with a total capacity of almost 0.25 million TEU. 25 of these ships are Post-Panamax wide-beam containerships, which collectively represent over three-quarters of our fleet capacity. Wide-beam, by the way, allows ships to carry more cargo more efficiently by offering lower slot costs and lower emissions per slot. And nine of these ships have an ECO dimension; they are designed to be inherently more fuel-efficient and are the jewels of our fleet. On slide 6, we show the role that our ships play as flexible assets that form the backbone of global trade. Our midsize and smaller ships, all of which with one exception are below 10,000 TEU, sit at a sweet spot between high-operational flexibility and low costs and emissions per cargo slot. The map at the top left illustrates the first of these points well. Midsize and smaller ships trade everywhere, unlike the big ships over 10,000 TEU, which tend to be limited to the East-West arterial trades. Over 70% of global containerized trade volumes are accounted for by the non-mainlane trades, intermediate and regional trades, which are predominantly served by midsize and smaller ships such as ours. Much of our fleet also has best-in-class reefer capacity, positioning us well to meet our customers' demands for transporting ever more refrigerated cargoes, which is premium rated and shows growth at higher rates than non-reefer or dry cargo, as has been the case for some time. On slide 7, you can see our charter contract cover—the engine room of our business. The detail is broken out on our website and we've provided information on each of our recent new charters and extensions in our earnings press release issued this morning, but I will make a few bigger picture points here. The dark blue bars show new charters, which have been agreed during the course of 2020. And as you can see, we've been busy in securing charter coverage, securing multiple years of cover at attractive rates. The chart shows that charters agreed in 2Q 2020 hit a low and were generally very short in duration as we sought to secure employment for our vessels to ride out the trough period, but expecting the next renewal to be in a better market. This strategy has played out very well for us, with vessels coming back into the charter market under greatly improved circumstances. For example, feeders fixed in the second quarter in the mid-60s per day were subsequently fixed in Q3 in the low to mid-90s, an increase of over 40%. And today rates for such ships are over $12,000 per day—double what they were in the second quarter. For larger ships, the improvement has been even more dramatic. 8,500 TEU ships that we were fixing in the markets at rates of around $12,000 per day in the second quarter have climbed into the 20s in the third quarter and are now being fixed at rates as high as $30,000 per day. You will see that we've also taken advantage of this market to lock in attractive charters for three of our larger ships. The latest of these is Anthea Y, one of our ECO 9,000 TEU ships, for 33 months to 35 months. For commercial reasons, we can't yet disclose either the charterer or the exact day rate, but you can back into a good approximation of the rate if we tell you that the implied adjusted EBITDA that we expect over the medium charter term is close to $30 million. As George mentioned, this charter portfolio has announced more than $670 million of contracted revenue over an average of 2.3 years, giving us significant forward visibility. To put it another way, we've already locked in pretty much all of our adjusted EBITDA for this year 2020 and also have strong downside cover for 2021 combined with some potential upside. As we are entering the winter period, when the containership charter market normally sees a seasonal downturn, we continue to see very positive market conditions. And whilst there remain important questions about the further trajectory and the implications of COVID-19, Global Ship Lease has a strong base to weather any challenges while capitalizing on the opportunities ahead of us. With that, I'll ask Tom to walk us through the market.

Tom Lister, Chief Commercial Officer

Thanks, Ian. Let's turn to slide 8. So container shipping is a growth industry. Container volumes have grown every year of its 60-plus year history, with one definite exception and another probable one. The first exception is 2009 when the world was in the grip of the financial crisis, and the second will almost certainly be 2020 as a result of COVID-19. However, without wishing to make light of either crisis, the good news is that the rebound immediately after the financial crisis was immense. And from what we're already seeing, the rebound as the world gets to grips with COVID is also likely to be impressive. Now let's turn to slide 9, and George alluded to this earlier. Even during the depth of the downturn during the second quarter, the liner companies, our customers were making good money, thanks to strong capacity discipline. 2019 was actually considered to be a pretty good year, but liners' 2Q 2020 results were way up year-on-year. To illustrate, 2Q 2020 EBITDA for both Maersk and CMA CGM was up by more than 25% versus the same period in 2019. And liner results for the third quarter are generally expected to be even better. In fact, Maersk put out updated full-year 2020 guidance in the middle of October, materially increasing their EBITDA outlook versus the previous guidance they had provided in August. And 3Q freight rates have doubled year-on-year on the major indices. In fact, freight rates from China to the West Coast of North America are at their highest points in more than a decade. So in summary, our counterparties are in good shape, something the rating agencies are beginning to acknowledge. Turning to slide 10, you can see that supply-side trends are all moving in the right direction. Idle capacity is down sharply from 12% during the worst of the second quarter to about 1.6% today. And the big ship recycling facilities, which were closed for much of 2Q, have reopened, allowing scrap prices to rebound. On slide 11, you can see that supply-side fundamentals are also supportive for the ship sizes we're focused on. In other words, the size segments sitting within the red boxes of the two charts. Net fleet growth over the last few years has been negligible and even negative, and the order book pipeline is at record lows. In fact, as far as we can tell, the overall order book to fleet ratio, which stands at 7.8%, hasn't been as low as this for at least the last 40 years. And the picture for 2,000 to just under 10,000 TEU ships is even better at only 1.7%. Best of all, however, is the order book-to-fleet ratio for our core midsized post-Panamax segment at effectively zero. So what has all this done for earnings in the sector? The answer to this is that the charter market is on fire in a good way with rates up anywhere from 50% to well over double 2Q lows. The chart, which shows how rates have developed for various key sizes in the liquid charter market tells its own story. And all of the data on the chart only runs through the end of September. I can tell you that these positive trends have continued, and that rates for various segments are now either at or above pre-COVID levels. And as happened during 2019, the way up was led by the midsized Post-Panamax ships, with rate uplifts subsequently flowing down to the smaller sizes as each larger size segment sold out. So on that positive note, I'll turn the presentation over to Tassos to cover the financials.

Tassos Psaropoulos, CFO

Thank you, Tom. Now, slides 13, 14, and 15 show our unaudited pro forma consolidated balance sheet, statement of operations, and statements of cash flow based on the third quarter of 2020. Rather than going through every line item, let me point out a few key items. We generated revenue of $70.5 million during the third quarter and $212.8 million for the nine-month period. Our adjusted EBITDA was $41.6 million for the quarter and $123 million for the nine months. Both measures are consistent with the first two quarters of 2020 and up on third quarter 2019, despite the massive downturn in the first half of the year due to the COVID crisis. Our finance expenses are reduced by about 10%, regardless of the additional debt facilities for the acquired ships and the issuance of 2024 notes, mainly due to substantial amortization, decreased LIBOR, and an overall cheaper blended cost of our lending. Our normalized net income was $13.8 million for the quarter and $37.8 million for the nine months. Now, I won't go through them in detail now, but we have also included on slides 16 and 17, our adjusted EBITDA and operating cash flow calculator, as well as detailed CapEx guidance to assist you with your model. On slide 18, I would like to highlight two additional points: our continuous progress in diversifying our portfolio of high-quality charterers and also the diversification of our lenders. As some of you will recall, at the genesis of Global Ship Lease, the company's entire fleet was on long-term charter to CMA CGM. Following some early steps to diversify the customer base in all GSL, the merger between Poseidon and GSL allowed for significant additional diversification, which has continued. Since that time, we have continued to sign charters with a diverse set of top-tier counterparties while almost maintaining a strong working relationship with CMA CGM, who now account for just over 50% of our charter revenue. On the right side, you can see our highly diverse sources of debt capital. I won't go through this one by one, but you will recognize a wide assortment of leading banks and other financiers from around the world. Additionally, we have senior unsecured notes due 2024, as well as the 9.875% senior secured notes due 2022. As George mentioned at the outset, refinancing this high-cost debt from the legacy GSL days to benefit from our materially improved financial position is a strategic priority for us. With that, I would now like to turn the call back to George for closing remarks.

George Youroukos, Executive Chairman

Hi. I will briefly summarize on slide 19 before moving to your questions. First, we've got great forward contract cover: $674 million significantly up from three months ago, spread out over an average of 2.3 years. This generates sufficient cash to cover our debt service and CapEx, providing us with a resilient platform that has already been successfully stress-tested by the COVID crisis. With some charter renewals during the next months, we have upside exposure to the strong charter market. We also look to pursue selective and accretive growth opportunities in due course. Second, our balance sheet is strong. We have $114 million of cash, which is reassuring when times are challenging and unpredictable and provides us with resources for our prospective bond refinancing and for growth when the time is right. Moody's recently recognized our progress and the supportive market fundamentals by improving our credit outlook to B3+. We have no material debt maturities before mid-2022, and we have demonstrated access to multiple sources of non-dilutive capital. Third, we believe strongly that our fleet sits in the sweet spot. Our fleet has high operational flexibility and high reefer capacity with low slot costs and low emissions per cargo slot, all generating increased demand from charterers. Fourth, and maybe most importantly, the supply side fundamentals for mid-size and smaller ships are phenomenally attractive. Idle capacity is down to under 2%. Net fleet growth is expected to be negligible or even negative, as the order book is at record lows. So, the market has proved more resilient than many expected during the downturn. Our customers are making money, hand over fist, and rates in the charter market are on a steep upward curve with many exceeding pre-COVID highs. Against this backdrop, our strategic priorities remain the following: keep our people safe, both at sea and onshore; opportunistically refinance our 9.875% notes maturing in November 2022; and our overarching goal is business resilience, allowing us to lock in value in the firmer market and position ourselves for growth going forward. Thank you all for listening to our prepared remarks, which I hope have given you a good feel for the nature of our business, the opportunities we see, and how we plan to build value going forward. We'll now turn the floor over to you for Q&A.

Operator, Operator

Your first question comes from Liam Burke with B. Riley.

Liam Burke, Analyst

Yes. Thank you. Good morning or good afternoon. I have a question on the 2022 senior notes. You had a ratings upgrade by the agencies. You have a strong asset base. Obviously, you have plenty of time. Could you give us a sense as to what the timing is since it is now a strategic priority?

George Youroukos, Executive Chairman

Ian, you want to take this?

Ian Webber, CEO

Sure. Liam, thanks. We're a little reluctant without a timeline here. The experience shows that externalities can affect what we do, but you're absolutely right. It is our number one priority. We had hoped to get something done in the first half, and we were pretty close before COVID-19 just interrupted everything. But with a very positive charter market, which looks likely to continue—at least there's no reason why it should not continue—driven by the fundamentals of supply and demand, particularly supply where fleet growth is negative in our sub-sectors and some certainty or less uncertainty in the U.S. political situation, I guess. We're redoubling our efforts on the refinancing, and we're working extremely hard to get something done as soon as possible. Because obviously, if we can reduce our interest cost by 2 or 3 points, then we should do that as soon as possible to start generating incremental cash flow to develop the business.

Liam Burke, Analyst

Sure. That's fair. And then, you've been pretty opportunistic on asset acquisitions. Timing seems to be pretty good as the market has come your way now. With the strengthening of charter rates, how has that affected your acquisition opportunities?

George Youroukos, Executive Chairman

Well, I would say that it has not. In our industry, there are very few buyers, especially in the larger sizes that we focus on—Post-Panamaxes. So the competition is not that strong. And we are considered one of the best buyers, one of the most active buyers in the industry. Therefore, we have, in many cases, first-look transactions, especially transactions that never come to the market—private transactions. So, our ability to execute on transactions has not changed because of the strong market. And I believe that with the right opportunities, once we switch into growth mode, we will continue to deliver similar transactions to those we've done in the past year.

Liam Burke, Analyst

Great. Thank you, George. Thank you, Ian.

George Youroukos, Executive Chairman

You’re welcome.

Operator, Operator

Your next question is from Ward Blum with UBS.

Ward Blum, Analyst

Good morning, great report. I know you're working hard on refinancing the 2022 debt and you may not be able to give a specific answer to this, but I'm interested in your general response. I'm assuming that the refinancing will not include any restrictive covenants that prevent you from starting a dividend policy again for the common stock?

George Youroukos, Executive Chairman

Well, I would tell you that I would answer that as a major shareholder in the company. Clearly, companies are there to create shareholder value and distribute dividends. So our company's financials are pretty strong, and we do not need to have restrictions on dividends in our refinancing. So I would say that it is a priority to have maximum flexibility in what we will consider and execute at the end as a refinance. If you want to add to that, Ian?

Ian Webber, CEO

Only to say that I obviously agree with George. We want to not only reduce the interest cost of our refinance debt, but also increase financial flexibility. Dividends are hugely important. GSL is in a great position now to make acquisitions once we've refinanced. But to do that in due course, we will need to raise equity. And to raise equity efficiently, the stock should be paying a dividend. So we're very focused on ensuring appropriate dividend capacity.

Ward Blum, Analyst

Thank you very much.

Operator, Operator

Your next question is from Joseph Farricielli with Cantor Fitzgerald.

Joseph Farricielli, Analyst

Hi. Good morning. I see cash of $98 million—could you provide us with what your total credit availability is?

George Youroukos, Executive Chairman

Tassos, do you want to take that?

Tassos Psaropoulos, CFO

If you go to the appendix, let me see the appropriate page in the presentation, we have a full breakdown of our debt structure.

Joseph Farricielli, Analyst

Yeah. I didn't see— I was looking at...

Ian Webber, CEO

But we don't have any undrawn facilities, the lines of credit.

Tassos Psaropoulos, CFO

Nothing like that, because there is...

Joseph Farricielli, Analyst

Okay. I thought there was still one revolver.

Ian Webber, CEO

No. There's no revolvers. I mean, if there's something called a revolver, it isn't—I don't think there is anything called a revolver. Now all of our debt is secured on ships and financed by ships. We don't have any general corporate facilities. And we don't have any lines of credit that we haven't drawn. We do have five ships which are unencumbered and would be available to collateralize new finance, either stand-alone or as part of the refinancing of the bonds that we've previously talked about.

Joseph Farricielli, Analyst

Right. Okay. And so thinking of liquidity, what are the big things moving forward? Are you seeing any increase in costs, any inflation? What—anything out of the norm, given the impacts of COVID?

Ian Webber, CEO

No, not really. I mean EBITDA, which is kind of a starting point for cash, is revenue. We've talked about revenue. We've got huge visibility on revenue, and we don't experience bad debt. We've never had a bad debt. On costs, costs are pretty stable. They've been fluctuating a little, but not materially. And part of that is actually due to COVID, where we've either not been able to change crews as efficiently as previously or where we have had to incur incremental air travel costs as operators have put their prices up. We've given you information on debt service. And we provided information on CapEx, which is dry-docking and scrubber installation. So I wouldn't say—Tassos, correct me if I'm wrong, but I wouldn't say that there's anything out of the ordinary, either COVID-related or anything else factored in the foreseeable future.

Tassos Psaropoulos, CFO

Exactly. I believe that all extraordinary have already been materialized in the previous quarter. We don't expect unless, I don't know, something very unpredictable appears in the global market.

Joseph Farricielli, Analyst

Okay, great. Thank you. And then, the Citi loan that last balance, is it every November that you are required to make these—

Tassos Psaropoulos, CFO

We have already paid at the end of October.

Joseph Farricielli, Analyst

Okay. I'm sorry if I missed that.

Tassos Psaropoulos, CFO

The last $4.7 million have already been paid.

Joseph Farricielli, Analyst

Already been paid. Okay. So then on that—

Ian Webber, CEO

Yes. So that's gone. That's gone. There's nothing left.

Joseph Farricielli, Analyst

Yes. So on the next $35 million, it all goes to the bondholders—nothing for—

Ian Webber, CEO

Correct, correct.

Joseph Farricielli, Analyst

Okay, okay. Very good. Thank you, gentlemen.

Ian Webber, CEO

Correct. And that's mandatory. There's no option to it.

Tassos Psaropoulos, CFO

Exactly, and that—

Phil Larson, Analyst

Hi, guys. Congrats on another strong quarter. I was going to ask about the amort as well. And then, the other just quick one for me is, I noticed that you repurchased a small piece of the notes during the quarter. Have you repurchased any more subsequent to quarter end?

George Youroukos, Executive Chairman

Tassos, you want to—

Tassos Psaropoulos, CFO

In our press release, we actually mentioned it; it's a very small part that we've purchased after the end of the quarter.

Phil Larson, Analyst

I'm sorry, I must have just missed that. Can you tell me how much it was?

Tassos Psaropoulos, CFO

Let me check. Ian, do you have it in mind? I remember it was around $0.5 million, if I remember correctly.

Ian Webber, CEO

I don't.

Phil Larson, Analyst

That's fine. I can find it.

Tassos Psaropoulos, CFO

Yes, yes. But it's not a material portion.

Unidentified Analyst, Analyst

Good afternoon everybody. It's a dog barking. So I scoured the press release, and I scoured the investor presentation online, and nowhere do I see any mention of earnings per share. And I understand the business is leveraged, and EBITDA is an important metric for the leveraged loan scenario. But I'm wondering when can we start talking about earnings per share because there seems to be significant earnings per share. And I understand that the capital structure may be complicated with different classes of stock. But I think at this point, there's a story to be told for the equity investors, and it's not being disclosed by the focus on servicing the debtors. So I guess this is kind of a suggestion that management take a look at promoting or disclosing earnings per share and not just service from a presentation perspective the lenders. So when I calculate, if I use the Class A shares outstanding, it gets complicated after that; it's like $0.76 per share for the quarter. And that's an impressive number for a $7 stock. Now I understand there's leverage. But I think, again, I think there's a story to be told here for the equity investors that is not making it through the clutter of all the very important details of the operating business but from—for equity investors, I think there should be some interest here.

George Youroukos, Executive Chairman

Thank you for your comment, which is indeed very, very constructive. Tassos will give you the answer to that. But I totally agree with you. It's a very good point.

Tassos Psaropoulos, CFO

Just to mention that, as always, in our 6K that's going to be released after the call today with the results, the net earnings per share will also be disclosed there. So you can easily find the full disclosure; but it's not in the presentation you're right.

Unidentified Analyst, Analyst

But you have to go looking for it and it should be in the headlines somewhere?

Tassos Psaropoulos, CFO

True. True. True. Just for you to know this $0.87, if I remember correctly, on a diluted basis. And noted for that, we're going to include that next time.

Unidentified Analyst, Analyst

Okay. Thank you.

Operator, Operator

There are no further questions in queue at this time. I'll turn the call back over to Mr. Ian Webber for closing comments.

Ian Webber, CEO

Great. Thank you very much everybody. Thanks for listening to our commentary. We look forward to providing you an update on Q4 earlier in the year. Thank you very much.

George Youroukos, Executive Chairman

Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.